By Jonathan Huntley
CBO’s analyses of the long-term effects of changes in federal fiscal policy include the effects of changes in federal budget deficits on aggregate output and income. Those effects depend on the responses of private saving and net inflows of foreign capital to changes in deficits. This paper reviews empirical estimates of those two effects and explains how changes in private saving and net inflows of foreign capital can offset some of the effects of changes in deficits on national saving and private domestic investment. In its analyses, CBO uses a range of estimates to reflect the high degree of uncertainty surrounding the magnitude of those offsets. On the basis of results published in the empirical literature, CBO concludes that for each dollar’s increase in the federal deficit, the effect on investment ranges from a decrease of 15 cents to a decrease of 50 cents, with a central estimate of a decrease of 33 cents.